5 September 2024 : Indian Express Editorial Analysis

1. AN UPWARD TICK 

(Source: Indian Express; Section: The Editorial Page; Page: 10)

Topic: GS3– Indian Economy

Context:

The article discusses the World Bank’s updated growth forecast for the Indian economy, raising it to 7% for the year, in line with other agencies like the IMF and ADB.

India’s Growth Outlook Revised Upwards

• The World Bank has raised its growth forecast for India, now predicting a 7% growth rate for the year, up from the earlier 6.6%. This comes shortly after government data revealed that the Indian economy grew at 6.7% in the first quarter, which was slightly lower than the Reserve Bank of India’s (RBI) estimate of 7.1%.
• Despite this, the World Bank’s forecast aligns with other agencies such as the International Monetary Fund (IMF) and the Asian Development Bank (ADB), both of which also project growth at 7%.
  The RBI remains slightly more optimistic, expecting growth at 7.2%, with various analysts presenting similar projections within this range.

Drivers of Economic Growth

• One of the key factors behind this positive outlook is the anticipated rebound in private consumption, especially as rural incomes recover.
• The first quarter saw consumption grow by 7.4%, a significant improvement from last year’s 4% growth. A good monsoon season, following the previous year’s El Niño-induced rainfall deficit, is expected to boost agricultural output, leading to higher rural incomes and increased demand.
• However, the World Bank notes a potential slowdown in investment growth, mainly due to reduced government capital expenditure. Despite this, the medium-term prospects remain favorable, with growth expected to average around 6.7% over the period from 2025 to 2027.

Challenges in Export Competitiveness

• While India’s overall economic outlook is positive, the report paints a concerning picture regarding its export performance.
• India has struggled to capitalize on the export opportunities left by China’s declining share in low-skill manufacturing sectors such as apparel, textiles, leather, and footwear.
• Countries like Bangladesh and Vietnam have emerged as key beneficiaries in these sectors, with Poland, Germany, and France also gaining market share in global exports.
• One of the factors limiting India’s export potential is its high tariff and non-tariff barriers. According to the World Trade Organization (WTO), India’s average tariff has increased over the past decade and is now higher than that of its competitors.

The Impact on Employment

• The report also highlights the employment challenges linked to India’s export sector. As exports in both manufacturing and services become more skill-intensive, the direct and indirect employment generated by exports has declined.
• To address these issues, the government has made some efforts, such as lowering tariffs on several items in the recent Union budget. However, the report suggests that more substantial steps are needed, including reversing protectionist measures, reducing both tariff and non-tariff barriers, and pursuing more free trade agreements.
• Greater integration with global value chains is seen as crucial for improving India’s export competitiveness and generating employment in these sectors.

Opportunities and Challenges for the Indian Economy:

Export sector: India can expand its export portfolio by increasing its exports of electronics, green technology items, textiles, garments, and footwear in addition to its strengths in IT, business services, and pharmaceuticals. However, India has been losing ground to rivals in the labour-intensive apparel and footwear sectors. India’s share in global apparel exports fell from 4% in 2018 to 3% in 2022 due to increased production costs and decreasing productivity. Meanwhile, countries like Bangladesh, Vietnam, Poland, Germany, and France have managed to increase their global export share in major job-creating sectors by up to 2% between 2015 to 2022. Trade barriers: The global trade landscape has witnessed increased protectionism in recent years. The post-pandemic reconfiguration of global value chains has created opportunities for India. India has boosted its competitiveness through the National Logistics Policy (NLP) and digital initiatives that are reducing trade costs. However, tariff and non-tariff barriers have increased and could limit the potential for trade-focused investments. Current account deficit (CAD): The CAD stood at 0.7% in FY24 compared to 2% in FY23. Foreign exchange reserves reached an all-time high of $670.1 billion (in August 2023), equivalent to 11 months’ worth of spending, thanks to a falling CAD and robust inflows from foreign portfolio investments. However, the WB predicted a steady widening of the CAD from 1.1% in FY25 to 1.2% in FY26 and 1.6% in FY27. Jobs in India: While India is the fastest-growing major economy, urban youth unemployment remains high at 17%. Jobs in India generated directly and indirectly connected to international trade have declined over the last decade. The country has missed out on the export opportunity presented by China’s withdrawal from labour-intensive manufacturing sectors. To create more trade-related jobs, India can integrate more deeply into global value chains, which will also create opportunities for innovation and productivity growth.

Practice Question:  Discuss the factors contributing to the World Bank’s upward revision of India’s growth forecast and analyze the challenges faced by India in enhancing its export competitiveness and employment generation in the context of global trade (250 words/15 m)